mortgage closing costsMortgage closing costs, also called mortgage settlement costs, can add a significant cost to buying a home. A closing can also involve many people and be confusing. The buyer, the buyer’s real estate agent, and the seller’s real estate agent are all involved. Lawyers for both the buyer and seller are also involved in the transaction.

Settlement costs can add thousands of dollars to cost of buying a home so it pays to comparison shop and negotiate with everyone! When you compare mortgage rates also compare mortgage closing costs.

The general rule of thumb is closing costs will be about 3% of the purchase price of the home. In some high tax areas the cost could go as high as 5% to 6% of the purchase price. In addition, the lower your credit rating and score, the more you will pay.

If you haven’t started the home buying process, get a copy of your credit report and score before you start. You might find inaccuracies that have lowered your credit rating. You can take preemptive steps to correct those errors and increase your credit score.

The one thing you should remember about reading this is to ask your lender for your HUD-1 statement.

The HUD-1 statement – Mortgage Closing Costs

The Real Estate Settlement Procedures Act also requires the lender to give you a copy of the HUD-1 at closing. The lender is required to provide this to you one day before the closing. This final statement will show all the fees and charges you will be expected to pay at closing. Why do you need to see your HUD-1 statement? To avoid any nasty surprises at closing!

Mortgage Closing Costs – Application fee

The lender or broker will charge an application fee for processing your loan request and checking your credit report.

Estimated cost: $75 to $300, including the cost of the credit report for each applicant

Loan origination fee

The origination fee is charged for the lender’s work in evaluating and preparing your mortgage loan. This fee can cover the lender’s attorney’s fees, document preparation costs, notary fees, and so forth.

Estimated cost: 1% to 1.5% of the loan amount

Mortgage Points

Points are a one-time charge imposed by the lender, usually to reduce the interest rate of your loan. One point equals 1% of the loan amount. For example, 1 point on a $100,000 loan would be $1,000. In some cases–especially in refinancing–the points can be financed by adding them to the amount that you borrow. However, if you pay the points at settlement, they are deductible on your income taxes in the year they are paid (different deduction rules apply when you refinance or purchase a second home). In your purchase offer, you may want to negotiate with the seller to have the seller pay your points.

You don’t have to pay points but you will pay a higher interest rate on the loan.

Estimated cost: 0% to 3% of the loan amount

Lenders want to be sure that the property is worth at least as much as the loan amount. This fee pays for an appraisal of the home you want to purchase or refinance. Some lenders and brokers include the appraisal fee as part of the application fee; you can ask the lender for a copy of your appraisal. If you are refinancing and you have had a recent appraisal, some lenders may waive the requirement for a new appraisal.

Lender-required home inspection fees

The lender may require a termite inspection and an analysis of the structural condition of the property by an engineer or consultant. In rural areas, lenders may require a septic system test and a water test to make sure the well and water system will maintain an adequate supply of water for the house (this is usually a test for quantity, not for water quality; your county health department may require a water quality test as well, but this test may be paid for outside of the settlement). Keep in mind that this inspection is for the benefit of the lender; you may want to request your own inspection to make sure the property is in good condition.

Estimated costs: $175 to $350

Prepaid interest

Your first regular mortgage payment is usually due about 6 to 8 weeks after you settle (for example, if you settle in August, your first regular payment will be due on October 1; the October payment covers the cost of borrowing the money for the month of September). Interest costs, however, start as soon as you settle. The lender will calculate how much interest you owe for the part of the month in which you settle (for example, if you settle on August 16, you would owe interest for 15 days–August 16 through 31).

Estimated cost: Depends on loan amount, interest rate, and the number of days that must be paid for (a $120,000 loan at 6% for 15 days, about $300; a $142,500 loan at 6% for 15 days, about $356).

Private mortgage insurance (Private MI)

If your down payment is less than 20% of the value of the house, the lender will usually require mortgage insurance. The insurance policy covers the lender’s risk in the event that you do not make the loan payments. Typically, you will pay a monthly premium along with each month’s mortgage payment. Your private MI can be canceled at your request, in writing, when you reach 20% equity in your home, based on your original purchase price, if your mortgage payments are current and you have a good payment history. By federal law your private MI payments will automatically stop when you acquire 22% equity in your home, based on the original appraised value of the house, as long as your mortgage payments are current.

Estimated cost: 0.5% to 1.5% of the loan amount to pre-pay for the first year.

Some lenders will pay for lender’s private mortgage insurance (LPMI)–and in turn will charge a higher interest rate. Unlike private MI that you pay, there is no automatic cancellation once you acquire 22% equity. To eliminate the LPMI, you must refinance the loan, which in turn means carefully considering market interest rates and settlement costs at the time to see if refinancing would be an advantage, rather than keeping your current mortgage.

Your lender will require that you have a homeowner’s insurance policy (sometimes called hazard insurance) in effect at settlement. The policy protects against physical damage to the house by fire, wind, vandalism, and other causes. This insures that the lender’s investment will be secured even if the house is destroyed. If you are buying a condominium, the hazard insurance may be part of your monthly condominium fee; you may still want homeowner’s insurance for your furnishings and valuables.

Estimated cost: $300 to $1,000 (depending on the value of the home and the amount of coverage; you can estimate the cost to be about $3.50 per $1,000 of the purchase price of the home).

Flood determination fee

If your home is in a flood hazard area where federally subsidized flood insurance is available, lenders cannot make a mortgage loan for your home unless you buy flood insurance. Your lender may charge a fee to find out whether the home is in a flood hazard area.

Estimated cost: $15 to $50, this is not the cost for the flood insurance; flood insurance, if required, would be in addition to your homeowner’s insurance and may cost from $350 to $2,800 depending on location and property.

Escrow (or reserve) funds

Some lenders require that you set aside money in an escrow (reserve) account to pay for property taxes, homeowner’s insurance, and flood insurance (if you need it). Lenders use escrow funds to ensure that these items are paid on time to protect their interest in your home. With an escrow account, money is held by the lender or the lender’s agent, who then pays the taxes and insurance bills when they are due. All these costs can be part of the overall mortgage closing costs you will have to come up with at closing.

At settlement, you may need to provide some payment into this account, depending on when payments will be due. For example, if you are buying your home in August and property taxes are due the following January, you will need to deposit funds into your escrow account at settlement so that you have enough to pay the taxes when they become due in January.

Survey costs

Lenders require a survey to confirm the location of buildings and improvements on the land. Some lenders require a complete (and more costly) survey to ensure that the house and other structures are legally where you and the seller say they are.

Estimated cost: $150 to $400

The costs do add up but if you ask for your HUD-1 statement or a “good faith estimate” nothing will come as a shock to you.
At various points during the loan application process, you are entitled to estimates of the mortgage closing costs and fees associated with getting a mortgage.

“Good Faith Estimate”

With such a long list of costs at closing, it is important to know what to expect. The Real Estate Settlement Procedures Act (RESPA) requires your lender to provide a “good faith estimate.” This is an estimate of all your mortgage closing costs. A lender is required to give this to you within 3 business days of submitting your application for a loan, whether you are purchasing or refinancing the home. This is a good faith estimate, but the actual expenses at closing may be somewhat different. If you are purchasing the home, you will also get an information booklet, Buying Your Home: Settlement Costs and Helpful Information.

Truth in lending information

For home purchases, the lender is required, under the Truth in Lending Act, to provide a statement containing “good faith estimates” of the costs of the loan within 3 business days of submitting your application. This estimate will include your total finance charge and the annual percentage rate (APR). The APR expresses the cost of your loan as an annual rate. This rate is likely to be higher than the stated contract interest rate on your mortgage because it takes into account discount points, mortgage insurance, and certain other fees that add to the cost of your loan. When refinancing your mortgage, you will receive the truth in lending disclosures before you settle.

Fees paid outside of settlement

Some fees may be listed on the HUD-1 and marked as “Paid Outside of Closing” (or “POC”). You will pay some of these fees, such as for credit reports, appraisals and mailing costs, before the closing. Other fees, such as those to a mortgage broker, you will pay at settlement.

Things to remember about getting a mortgage, the closing costs and the closing (settlement) process

Shop around for the best rate, you can save thousands of dollars on each .25 percent difference in the loan, use our mortgage calculator to see the difference.

Get a copy of your credit report before you apply for a loan to see where your credit stands.

Ask for the “Good Faith” estimate of mortgage closing costs when you apply for the loan.

Get your lender or broker to give you a copy of your credit report (if you haven’t gotten already).

Have your lender or broker to give you a HUD-1 statement of the mortgage closing costs. Remember, they won’t give it to you unless you ask for it.

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